The supplementary budget which was announced on 7 April 2009 provides for increased income levy rates, a reduction in the thresholds at which each rate applies and a reduction in the exemption amount below which the income levy does not apply. The accompanying Financial Resolution (which must be confirmed by the enactment of a Finance Act) may result in payments, which have already been received, being subject to an additional income levy amount. Importantly, whilst this measure may have an impact on an individual's ultimate income levy liability, it should not alter employers' obligations in respect of payments made prior to 1 May 2009.
Payments made to employees from 1 January 2009 to 30 April 2009
The Financial Resolution makes it clear that, in relation to payments made up to and including 30 April 2009, employers should simply continue to operate the income levy on the basis of the current income levy rates, thresholds and exemption amount.
Payments due to be made to employees from 1 May 2009
For payments made on and after 1 May 2009, employers should operate the income levy on the basis of the new rates, thresholds and exemption amount. It is understood that the Revenue will contact employers in this regard. Provided that an employer has operated and will operate the levy on the basis of the correct rates, thresholds and exemption amount for both the period 1 January to 30 April and the period 1 May to 31 December, the employer should have complied with its obligations regarding the deduction of income levy amounts.
Additional income levy liability for employees
Employees may have an additional income levy liability in relation to any payments made during this period, which may be caught by the application of certain "blended" or "composite" rates to their entire 2009 income. The reason for this is that, independent of the employer's obligation to withhold levy amounts, which applies at the "current" and "new" headline rates, an employee is individually ultimately liable for the income levy for the entire tax year at the "composite" rates. It is not yet clear how the Revenue will in practice seek to collect this, although we understand that the matter is currently under consideration. This is likely to mean that where a lump sum is received by an employee, or their salary varies throughout the year, the amount deducted by the employer may not be the same as the employee's ultimate income levy liability.
Impact on termination payments made prior to 1 May 2009
In practice, the income levy is operated in tranches based on weekly payment levels as set out below. This means that termination payments made to date may have been subject to the 2% or 3% rates on part of a lump sum payment, notwithstanding that an employee's total annual income is likely to be under the relevant original threshold. The consequence of this is that individuals may in practice already have discharged all or part of their additional levy liability.
Payments made up to and including 30 April - current income levy thresholds and rates
Assuming a weekly payroll:
- 1% on the first €1,925
- 2% on the next €2,885
- 3% on any excess
- Exemption amount €18,304
Payments made from 1 May - new income levy thresholds and rates
Assuming a weekly payroll:
- 2% on the first €1,443
- 4% on the next €1,922
- 6% on any excess
- Exemption amount €15,028
Guidance for Employers
Employers who are currently considering the levels of ex gratia redundancy payments to be made to their employees should refrain from making any representations to their employees regarding the net amount of any such payment and might consider highlighting the fact that there may be a difference between the net sum which the employer will pay to them and their ultimate tax liability in respect of that payment. Whilst there have been reports that the increased health levies will be applied in the same way as the increased income levies, and that provision may be included to exclude the application of the composite or blended rates to redundancy payments received prior to 30th April 2009, we will have to await publication of the Finance Bill (expected in early May) for clarification of these issues which were not included in the Financial Resolution passed on Budget Day. The Bill is also expected to include details of the proposed collection mechanism for the increased income levies which may clarify the proposed application of the composite rates to payments made during 2009.